OPEC decision sends ripples through markets

Oil prices were at the centre of attention in the past week after the Organization of Petroleum Exporting Countries (OPEC) declined to cut production in response to falling prices. The group in effect signaled it will not act to balance supply and demand and will instead let financial markets determine the price of oil. Countries that are net exporters of crude, and companies whose operations are tied to the oil industry, may suffer from the decline in prices. On balance, though, the drop looks positive for the global economy.

Despite the hit that individual exporters of oil and other commodities are taking, falling oil prices may be positive for the global economy as a whole. The IMF estimated that a 30% decline in oil prices could add 0.8% to economic growth for most advanced economies, all of which are net importers of oil. ## Energy sector suffers from sharp drop in crude oil price. ![](https://api.nnip.com/DocumentsApi/v1/images/RWS_P_203228/display) ## Saudi Arabia overrules production cut OPEC’s decision, taken at its November 27 meeting, marks a departure from the cartel’s past frequent use of the production quota to influence prices, usually with the member states’ budgetary requirements in mind. Most of the group’s 12 members, whose coffers have been hit by crude’s decline in the last five months, were calling for a reduction in the daily output target of 30 million barrels a day as a means of shoring up the price. They were overruled by a dissenting group led by Saudi Arabia, by far the biggest OPEC producer. The price of Brent crude fell 10% the next day, extending its more than 30% decline since June. ## OPEC bets it can outlast US shale oil producers With the floor under prices removed, markets are now likely to test the breaking point of US shale oil producers. Estimates of market prices they need to break are generally less than $70 a barrel for West Texas Intermediate crude, the New York-traded benchmark. OPEC, or at least Saudi Arabia, may be betting that many US producers will not be able to turn a profit and will be forced out of the market. For the time being, though, crude oil prices may have to continue to fall to reach the pain threshold where action will be taken.